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Office Confidence Stalls with Lack of Rent Growth, Survey Finds

A lack of rent growth in the office sector continues to concern investors, according to a report on the commercial real estate market from consulting firm PwC.

According to the report, absorption levels and rent growth in the office sector are falling short of buyers’ expectations in many metropolitan markets. As such, investors surveyed indicated that “pricing remains steep for office assets in most top markets.”

Mitch Roschelle, partner with PwC and leader of the firm’s U.S. real estate advisory practice, said that despite investors’ concerns, the market does offer some hints of improvement. He noted that constraints on new construction have left the supply of office space at a 30-year low. Demand for that space is starting to “creep back into the market,” according to Roschelle.

Additionally, the latest reports show that approximately 200,000 new jobs have been added to the economy in the last two months. Data also indicate the market for single-family homes is rebounding.

Still, rent growth remains stalled, Roschelle said.

The suburban segment might offer the best signs of encouragement for the office sector. Roschelle pointed out that improvement in the single-family home market is helping to propel demand for suburban office space.

“If you look at the typical office building in the suburbs, it was largely dependent on the housing market and people tied to the housing market, such as title companies, lawyers, banks and construction companies,” he said. “The tenant roster of those buildings in 2006 was flush with people connected to housing.”

Looking outside the office sector, Roschelle said investors don’t expect that the recovery in the housing market will have a large impact on the multifamily sector. The PwC report noted that underlying fundamentals are projected to remain positive for the sector through 2016 as a result of pent-up demand and strict lending requirements for new-home buyers.

Roschelle added that only a fraction of buyers in the single-family market are coming from the multifamily markets—many have been living with their parents or renting single-family homes. Also, some homeowners are upsizing from a smaller house, according to Roschelle.

The retail sector remains a location-specific play for 2013, according to the survey.

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